Is Obama Committing Political Suicide? President Calls Obscene Wall St. Bonuses 'Part of the Free Market System'
After several weeks of strong showings in the media, President Barack Obama appears to have committed political suicide in an interview with Bloomberg focusing on bank bonuses. Just as bad, Obama's statements praising bailout barons and downplaying their bloated bonuses amount to outright economic insanity.
Here's what Obama had to say about the $9 million bonus Goldman Sachs CEO Lloyd Blankfein will be paid and the $17 million bonus JPMorgan Chase CEO Jamie Dimon will receive:
"There are some baseball players who are making more than that and don’t get to the World Series either, so I'm shocked by that as well....I know both those guys; they are very savvy businessmen," Obama said. "I, like most of the American people, don't begrudge people success or wealth. That is part of the free-market system."
The full Bloomberg interview will not run until Friday, so it's conceivable that these comments were taken out of context, but it's hard to read anything remotely positive into them. Obama either truly does not understand why people are upset about bank bonuses, or is willfully misinterpreting the outrage in an effort to harvest campaign cash from Wall Street.
I have no particular love for professional athletes, but let's give credit where credit is due: Baseball players did not wreck the global economy. Baseball players did not destroy seven million jobs and send the unemployment rate into double-digits. Baseball players did not con millions of people into taking out predatory subprime loans, and baseball players did not rob their fans with undisclosed overdraft fees. Baseball players did not come to taxpayers and demand $17.5 trillion to save their teams, and baseball players did not make their money in 2009 by speculating in financial casinos with taxpayer funds.
We do not have a free market in banking, we have a financial free-for-all in which ordinary citizens shoulder all of the risk while wealthy bank executives enjoy all of the rewards.
After the enormous uproar over AIG bonuses in 2009, it's hard to believe that Obama really doesn't know how angry people are about Wall Street pay. Both Goldman Sachs and JPMorgan spent heavily on Obama's 2008 presidential run, and Obama is almost certainly making the calculation that their money in 2010 will outweigh the voter unrest.
That's easily the worst political calculation Obama has made since entering office. One of the main reasons Obama and Congress were unable to pass financial reform in 2009 is their complete inability to communicate on the issue with voters. Financial reform is complicated, and not everybody understands the technocratic twists and turns. Most people probably don't know why we need, for instance, to trade credit default swaps on exchanges, and they probably don't know what legislative loopholes would sink that effort.
But everybody understands that bailout bonuses are totally obscene. Everybody grasps that U.S. taxpayers saved the biggest financial institutions from failure in 2008, and that continued rescue efforts have allowed banks to book the huge profits that support their bonuses. Of all the issues Obama could have caved on for political expediency, he picked the one that resonates most with voters.
Of course, it's also the issue that resonates most with bankers, and one that has serious economic implications. Compensation is the one aspect of the financial status quo that CEOs and traders are most desperate to maintain. And bloated bonuses were a key driver of the crisis itself. Banks swelled into too-big-to-fail proportions over the past decade in large part out of a quest for bigger paychecks. If a $1 trillion bank and a $1 billion bank have the same profit ratios and pay their executives the same percentage of profits, the CEO of the $1 trillion bank will take home a lot more money. He's working with a bigger pie, even if he gets the same percentage cut the small bank CEO gets.
In other words, Wall Street paydays are very much part of the problem, and voters know it. Defending Wall Street CEOs while the rest of the country is out of work is not a winning strategy for the economy for the mid-term elections.
Andrew Leonard thinks the criticism is unfair after reviewing the full transcript of the offending section of the Bloomberg interview:
Q: Let's talk bonuses for a minute: Lloyd Blankfein, $9 million; Jamie Dimon, $17 million. Now, granted, those were in stock and less than what some had expected. But are those numbers okay?
THE PRESIDENT: Well, look, first of all, I know both those guys. They're very savvy businessmen. And I, like most of the American people, don't begrudge people success or wealth. That's part of the free market system. I do think that the compensation packages that we've seen over the last decade at least have not matched up always to performance. I think that shareholders oftentimes have not had any significant say in the pay structures for CEOs.
Q: Seventeen million dollars is a lot for Main Street to stomach.
THE PRESIDENT: Listen, $17 million is an extraordinary amount of money. Of course, there are some baseball players who are making more than that who don't get to the World Series either. So I'm shocked by that as well. I guess the main principle we want to promote is a simple principle of "say on pay," that shareholders have a chance to actually scrutinize what CEOs are getting paid. And I think that serves as a restraint and helps align performance with pay. The other thing we do think is the more that pay comes in the form of stock that requires proven performance over a certain period of time as opposed to quarterly earnings is a fairer way of measuring CEOs' success and ultimately will make the performance of American businesses better.
I disagree with Andrew here. Obama is still going out of his way to specifically compliment Dimon and Blankfein, suggesting that while some bonuses might not always be earned, these guys are savvy and deserve their millions. Obama is still shrugging off the pay packages as a ho-hum baseball scandal, not a matter of total market failure or basic democratic fairness.
From a policy perspective, it's all well and good for Obama to endorse say-on-pay, but shareholders of too-big-to-fail banks actually want their CEOs to take outlandish risks-- if the risk backfires, taxpayers will cushion the losses. Dimon and Blankfein have built behemoth businesses and political connections that ensure their shareholders are constantly being subsidized by the federal government. Of course shareholders want to pay them a lot to keep them around.
Even for the rare cases where shareholder democracy might help, say-on-pay is extremely easy to manipulate. Paying CEOs in stock rather than cash is a nice idea, but the current version of the say-on-pay bill moving through the Senate Banking Committee would even allow executives to take out insurance against declines in the value of that stock. In short, there is no way to fix the insane bonus culture on Wall Street without breaking up the big banks.